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5 Reasons an Amazon Smartphone Won't Kill Apple

A smartphone isn't such a smart idea, Amazon.

The rumor mills have been picking up steam when it comes to chatter about the potential for Amazon.com(Nasdaq: AMZN) to put out its own smartphone.

Things became more likely on Wednesday, when sources told The Wall Street Journal that the leading online retailer is working with Asian component suppliers to test an Amazon smartphone.

Sure, doing this makes sense. Digital delivery is the key to Amazon's ecosystem, and it's been in the tablet market since late last year. If you're going to build out a mobile operating system for tablets, it's only natural to branch out into wireless handsets as well.

However, if Amazon thinks taking on Apple's (Nasdaq: AAPL) iPhone is easy, necessary, or smart, it will probably be disappointed on all three fronts.

Let's go over a few of the reasons the dot-com darling is biting off more than it can chew.

1. Reading books on a smartphone is painfulAmazon has spent the past few years building out its digital ecosystem. Books, CDs, DVDs, and video games that it continues to sell in physical form have been given digital-media makeovers for Amazon's virtual storefront.

There's no denying that Amazon is the top dog when it comes to e-tail, but when it comes to digital media, it's the category killer only when it comes to books. Apple's iTunes and App Store are the names consumers think about when they want to download music, video, or games. Amazon is best known for its Kindle Store and the books, magazines, and other print publications that it brings to life on the screen.

Reading an article or browsing the Web is fine on a smartphone, but do you really want to squint your way through a leafy read when the entire page doesn't even fit on your screen? Amazon's biggest digital-media selling point would be lost in a smartphone, even if the company opts for a larger 5-inch device.

2. It's a conflict of interestAmazon Wireless is a great hub for shoppers to buy phones and mobile hotspots from all of the leading wireless carriers.

When's the last time you bought a non-Kindle e-reader or a non-Kindle Fire tablet on Amazon? Sure, they're there, but because the company devotes its home page to promoting its house brands, it's hard for the other names to get noticed.

Won't the same thing happen to Amazon Wireless if Amazon is selling its own branded phone?

3. A tablet or e-reader is a purchase, but a smartphone is a two-year commitmentAmazon has been able to sell millions of Kindle Fire tablets because they're a $199 purchase without any strings attached. Kindle e-readers start as little as $79.

Telling someone to buy a subsidized device -- as most smartphones are in this country -- requires the consumer to believe that a platform will be around in two years. More importantly, it requires faith that a consumer wants to be seen with a certain device for two years.

Amazon is as cool a brand as you can get as a retailer, but is there anybody really hankering to show off an Amazon-branded phone?

4. Subsidized smartphones are already cheap, so there's no pricing advantageMost wireless carriers have a plethora of smartphones they're willing to sell for as little as a penny. Why not? They know they stand to make roughly $2,000 over the two-year life of the contract that the devices are tied to in getting that subsidized price.

Where does that leave Amazon in pricing its handset? It was able to turn heads by selling its Kindle Fire for less than half of Apple's iPad, but there's no price point low enough when free Google(Nasdaq: GOOG) Android phones can be easily had through wireless carriers and even Amazon Wireless.

5. Prime perks may backfireA strong selling point for the Kindle Fire is access to Amazon's growing catalog of videos that it makes available to Prime shoppers at no additional cost.

This would naturally be a big selling point for an Amazon smartphone, because Amazon has been reluctant to offer video access to third-party portable devices the way it has with Kindle e-reader apps in the past.

Folks wanting to consume Amazon's digital video need to do so online, on a Kindle Fire, or through Web-tethered televisions and set-top box solutions. It's great to see Amazon streaming through Roku and TiVo(Nasdaq: TIVO) boxes as well as PS3 and Xbox consoles, but does Amazon really think it will ever catch up to Netflix(Nasdaq: NFLX) if it stays away from iOS and Android devices? Keeping this as an exclusive perk for Kindle Fire and eventually the Amazon or Kindle Phone is holding Amazon's digital initiatives back from their true potential.

An Amazon smartphone, quite frankly, is a dumb idea.

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Longtime Fool contributorRick Munarrizcalls them as he sees them. He owns shares of Netflix and is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has adisclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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